Are you using the http:// or file:// protocol? If you are trying to open the file via http:// request using localhost or 127.0.0.1, IE will want an internet connection and (it seems) will send requests out to your ISP, and back to the machine... but if you set up a virtual host, IE will recognize the address as being on an 'Local Intranet Zone'.
If you are using the file:// protocol, I'm not sure why it isn't working. It works for me (10.2.3 - IE 5.2.1). I do get all the PHP code, of course, but you can see the rest of the normal rendered HTML.